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Morgan Stanley Says Asia Capex Rebound Strongest Since Early 1990s

Chinese expansion drives regional investment into real assets but new Covid variant and Beijing’s strong-arm measures cloud future prospects, Morgan Stanley report says

Asian exports are tracking 5% higher than pre-Covid levels

 

(AF) Asian investment into plant and machinery is climbing at a faster rate than before the pandemic put the brakes on regional economies, with tech-focused exports helping to drive growth, according to Morgan Stanley.

Exports from the region are also above pre-pandemic growth levels as the rest of the world emerges from the Covid downturn to buy Asian-made technology and other goods.

Research by the US bank’s analysts, led by chief Asia economist Chetan Ahya, indicates that capital expenditure (capex) among Asian companies is now tracking 2% above its pre-pandemic path and is currently 7% higher. The turnaround began late last year, just three quarters after Covid hit, the study stated.

“We are seeing the strongest capex recovery unfold in Asia since the early 1990s,” according to the report, citing the earliest period of reliable data. “In the region ex-China, real fixed capex returned to pre-Covid levels in just three quarters, as compared to five quarters in the 2001 tech bubble burst cycle, seven quarters in the Global Financial Crisis, and 24 quarters in the 1997 Asian Financial Crisis.”

Swift Response

Asia’s economy has recovered quickly from the pandemic principally due to China’s swift response to the pandemic, which first took hold in the nation in late 2019. While its economy shrank for the first time in generations in the first quarter of 2020, China was the only major economy to post GDP growth last year and is forecast to expand 8.5% this year and 5.4% in 2022, according to the World Bank.    

Capex growth has been strongest in China, South Korea, Taiwan and Japan, due to their higher dependence on trade, the Morgan Stanley report said. Sectors that rely on exports, such as tech manufacturing, led the way as global demand for their products climbed.

Export growth from the region is 5% higher than before Covid, the report stated. The biggest gains were seen among companies that trade in technology and commodities, the latter benefiting from a surge in demand and prices for raw materials from food to coal and ore.

The sectors that saw most capex growth were also those that gained from government stimulus measures designed to pull economies from the Covid recession. Investment gains in machinery and transport equipment were the biggest as countries sought to bolster small businesses, low-income groups and services, the report stated.  

It noted that in China, capex and export growth helped offset a softening in consumer growth, which had been suppressed by continued Covid lockdowns as new infections emerged.

The report warned, however, that the rapid spread of the more contagious Delta variant of Covid and the rigour of China’s recent regulatory crackdowns on a number of industries were clouding the growth picture for Asia in the rest of 2021. 

While capex growth is expected to remain stable at an annual average of 5.2% over the next two years, consumer goods exports appear to have already peaked. Also, Southeast Asian nations are likely to experience a prolonged softness in growth as their vaccination programmes continue to lag behind the rest of the world, the report said.    

Growth was nevertheless expected to broaden from export-oriented companies as the rollout of vaccines revives consumption, it concluded.

 

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Mark McCord

Mark McCord is a financial journalist with more than three decades experience writing and editing at global news wires including Bloomberg and AFP, as well as daily newspapers in Hong Kong, Sydney and Melbourne. He has covered some of the biggest breaking news events in recent years including the Enron scandal, the New York terrorist attacks and the Iraq War. He is based in the UK. You can tweet to Mark at @MarkMcC64371550.

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